American banks rush to take up Fed's offer of emergency funds

Wednesday 19 December 2007 19.05 EST
First published on Wednesday 19 December 2007 19.05 EST

American banks fell over themselves to get their hands on $20bn (£10bn) of short-term liquidity provided by the Federal Reserve in the first fusillade to defend the stability of the global financial system.

The Fed announced yesterday that its auction of loans, which began on Monday, was more than three times over-subscribed. It received 93 bids for a total of $61.5bn and the money will be supplied at 4.65% - below the usual discount rate of 4.75%.

Jay Bryson, global economist at the American bank Wachovia, said the take-up was encouraging: "I think it's good news in the sense that it shows there's demand for funding out there. The banks can't get it from the market - but they can get it from the Fed at more reasonable rates."

The Fed's initiative is part of a co-ordinated programme with the Bank of England, the European Central Bank and central banks in Canada and Switzerland to pump liquidity into the credit-impaired financial system.

Economists believe the programme could help restore a degree of normality to banks. Dean Maki, chief US economist at Barclays Capital, said: "It's likely to make some difference, although there's no certainty about the magnitude. It does already seem to be making some difference to inter-bank lending spreads."

There is little sign, as yet, of the gloom lifting from the markets. By lunchtime, the Dow Jones industrial average was down 46 points to 13,185.

Backstory

Since voting to hold rates at 5.75% in August and September, the MPC has come round to the idea of cutting. In October David Blanchflower called for a cut at the MPC's post-Northern Rock crisis meeting. By November John Gieve joined Blanchflower but they were outvoted 7-2. This month the hawks became doves after three factors changed views on the MPC - a relapse in the financial markets; weakness in the servicesector and a drop in property prices.